Affordable Care Act Final Regulations Part III: Monthly Measurement of Full-Time Employees
On February 12, 2014, the Internal Revenue Service issued final regulations with respect to the Affordable Care Act (ACA). Part I of this series of articles provides an overview of the Final Regulations and Part II addresses transitional relief from the “play or pay” penalties.
Part III, below, deals with the monthly measurement method to identify the full time employees to whom minimum value coverage must be offered in order to avoid penalty.
Unlike the determination of applicable large employer status, which includes both full-time employees and non-full-time employees, the employer is at risk for the “play or pay” penalties only with respect to full-time employees to whom the employer does not offer affordable minimum value coverage in a given month. In the Proposed Regulations, theIRS recognized that if an employer had to determine whether an employee worked enough hours to be classified as full-time in a given month, it would be too late in the month to offer coverage, so the IRS developed a look back approach. This look back approach is also included in the Final Regulations and has been the subject of much discussion and publication since the proposed regulations were issued in 2012. In general, the employer establishes a “measurement period” (no longer than twelve (12) months and no less than three (3) months) during which an employee’s hours are measured to determine full-time status. Following the measurement period, the employer may have an administrative period (to perform enrollment) and then a stability or coverage period during which the employer must offer coverage to an employee determined to be full-time during the applicable measurement period.
Monthly Measurement Method
In response to the look back method in the Proposed Regulations, there were requests for a measurement method based on the hours of service performed each calendar month. The Final Regulations refer to this method of identifying full-time employees as the monthly measurement method and make it clear that an employer may determine an employee’s full-time status under a monthly measurement period.
Under the monthly measurement method, an applicable large employer must determine each employee’s full-time status separately each month. On its face, this monthly measurement would appear to track the historic practice of employers: to cover “full-time” employees, though if there is a change in status or employment, coverage would cease at the end of the month. However, these monthly determinations must be applied to the current month of an employee’s service. Consequently, the monthly measurement method is subject to unpredictable issues (e.g. a non-full-time employee last month may be full-time this month) and administrative burdens (monthly vs. annual determinations; monthly COBRA notices if coverage is terminated based on a reduction of hours).
Under the monthly measurement method, an employer will not be subject to penalty for failure to offer coverage to a full-time employee before the end of the period of three (3) full calendar months beginning with the first full calendar month in which the employee is otherwise eligible, if the employee is offered affordable minimum value coverage no later than the day after the end of that three (3) month period. This rule applies only once per period of employment of an employee.
To avoid the abuse of characterizing former employees as rehired employees after a short period of absence, the Final Regulations clarify that under the monthly measurement method, an employee must be treated as a continuing employee, rather than a new hire, unless the employee has had a period of at least thirteen (13) weeks during which no hours of service were credited (twenty-six (26) weeks for an employee of an employer that is an educational organization). At the employer’s option, the employee may be treated as a new hire if the employee is not credited with any hours of service during a period that is both at least four (4) consecutive weeks’ duration and longer than the employee’s immediately preceding period of employment (“rule of parity”).
To coordinate the three (3) month exclusion rule with the maximum ninety (90) day waiting period (and the regulations make it clear that three (3) calendar months is not equivalent to ninety (90) days), the regulations allow a reasonable and bona fide employment-based orientation period of up to one month beginning on the date of hire. This is a substantive and not time-based condition. The ninety (90) day period commences after this orientation period.
The Final Regulations allow an employer to determine an employee’s full-time employee status for a calendar month under the monthly measurement method based on the hours of service over successive one-week periods. Under this optional weekly rule, full-time employee status for certain calendar months is based on hours of service over four (4) week periods and for certain other calendar months on hours of service over five (5) week periods. In general, the period measured for the month must contain either the week that includes the first day of the month or the week that includes the last day of the month, but not both. For this purpose, week means any period of seven (7) consecutive calendar days applied consistently by the employer for each calendar month of the year. For calendar months calculated using four (4) week periods, an employee with at least 120 hours of service is a full-time employee, and for calendar months calculated using five (5) week periods, an employee with at least 150 hours of service is a full-time employee. Note however, that the employer penalties are determined on a calendar month basis, and the employer is only treated as having offered coverage for a calendar month if it offers coverage to a full-time employee for the entire calendar month, (the first day through and including the last day) regardless of whether the employer uses the weekly rule.
The administrative burdens associated with the monthly measurement method severely restrict practical application. Employers should consider some of the other options afforded in the Final Regulations (e.g. expanded definition of seasonal employees to mean those hired into positions for which customary employment is six (6) months or less and treatment of seasonal employees under the variable hour employee rules) before abandoning the relative convenience of the look back methodology.
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